Risk management is the process of identifying, analyzing, and responding to risk factors to minimize the effects of risk on an organization. Risk management attempts to control, as much as possible, future outcomes by being proactive rather than reactive to new or negative conditions that could impact the business.
Risks can be quantifiable, such as insurance premiums and claims costs, or they can be more subjective, such as damage to reputation and decreased productivity. In either case, risk management is used by businesses of all sizes to avoid uncertainty, reduce costs, and increase the likelihood of success.
Importance of risk management
Implementing a risk management process will equip a company with the necessary resources to adequately identify and deal with potential risk. Especially in enterprises, risk management is critical. Once a risk is identified, it’s easier to mitigate it if a process is laid out. Risk management helps a company identify potential risks, minimize their impact should they occur, and manage the results. Benefits of implementing a risk management plan include:
- Saving multiple resources such as time, money, assets, people, and property.
- Creating a secure environment for both staff and clients
- Reducing legal liability
- Increasing the stability of operations
- Reducing the threat of possible litigation
- Defining insurance needs to save on unnecessary premiums
The risk management process
The risk management process is a framework for actions that should be taken to manage risks. Questions that a risk management process should aim to answer are as follows.
- What can go wrong?
- Are there any organizational blindspots that need attention?
- How will a risk coming to fruition affect the company?
- Is the company prepared to respond to extreme events?
- What can be done if a risk occurs? How can the company prevent it?
Step 1: Identify the risk
The first step in the risk management process is to identify risks a business may be exposed to and arrange them in order of priority. It’s highly unlikely to minimize all existing risks, so prioritization ensures the risks that will more significantly affect a business are dealt with more urgently.
Types of risk can include legal, environmental, market, and regulatory risks. The benefit of identifying possible risks is that all stakeholders have access to the information and can implement a mitigation process if necessary.
Step 2: Analyze the risk
The scope of the risks identified must be analyzed. This includes determining the probability the risk will happen and the consequences. The goal of risk analysis is to understand how each risk could impact business functions and the business as a whole.
Step 3: Evaluate the risk
If not already done, risks need to be ranked. A risk that will only cause minor inconvenience should be ranked with lower importance, while risks that will cause major losses should be ranked highly. The company should then make decisions based on whether the risk is worth having.
Step 4: Mitigate the risk
After evaluating the risk, a company should develop a plan in mitigating the highest-ranked risks. This can be done by connecting with the risk to the appropriate department within the company. Plans for risk mitigation can include risk mitigation processes, risk prevention tactics, and contingency plans.
Step 5: Monitor and review the risk
If a risk can’t be eliminated, such as any market or environmental risk, it should be monitored. This can be done by occasionally following up on the risk and the plan put in place for it. The overall risk management process should also be monitored and updated as necessary.